Prior to Deng Xiaoping's economic reforms a work unit acted as the first step of a multi-tiered hierarchy linking each individual with the central Communist Party infrastructure. Work units were the principal method of implementing party policy. Also workers were bound to their work unit for life. Each danwei created their own housing, child care, schools, clinics, shops, services, post offices, etc.

The influence of a work unit on the life of an individual was substantial and permission had to be obtained from the work units before undertaking everyday events such as travel, marriage, or having children[citation needed]. Amongst other things, the work unit assigned individuals living quarters and provided them with food, which was eaten in centralized canteens. The danwei system was crucial to the implementation of the one child policy as the reproductive behavior of workers could be monitored through the danwei system. Workers not complying with policy could have their pay docked, incentives withheld or living conditions downgraded.

The increasing liberalization of China's economy led to state owned enterprises being put into competition with private enterprise and, increasingly, foreign Multinational corporations. The "iron rice bowl", the policy of job security for certain public sector employees, continued to prevent work units from dismissing workers, while private enterprises were able to hire and fire workers as they saw fit. The decision by the central and provincial governments to offer tax and financial incentives to foreign investors in order to encourage them to invest in China led to further difficulties for the danwei system as the state run enterprises were increasingly unable to compete.

At the same time the role of the work unit has changed as China has moved from a socialist ideology to "Socialism with Chinese characteristics". By 2000 much of the work unit's power had been removed. In 2003, for example, it became possible to marry or divorce someone without needing authorization from one's work unit.